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Dollar rises as Fed rate hike talk returns

Expectations for rising US interest rates have pushed the dollar to multi-month highs

The dollar rose against its European peers Wednesday as expectations of multiple US interest rate rises this year returned.

European equities closed modestly higher, helped by currency weakness in the region, but investors were spooked by North Korea's threat to pull out of a historic summit.

Wall Street drifted in morning New York trading, as upbeat US industry data and geopolitical worries cancelled each other out.

"The dollar index is finding itself at its best level since December," Fawad Razaqzada of Forex.com wrote in a note.

The euro, conversely, traded around the weakest level this year, with a series of soft economic data out of the eurozone denting the prospects of an end to the European Central Bank's crisis-era stimulus.

The pound continued to be dampened by Brexit uncertainty.

Expectations that the Federal Reserve may hike borrowing costs up to three more times this year have sent benchmark 10-year US bond yields to seven-year highs.

"Although yields are slightly weaker today, they remain well supported in the US, especially the short-dated ones, as investors continue to expect there to be at least two more rate increases from the Fed this year," Razaqzada added.

- 'Eye on North Korea' -

Ongoing uncertainty in Italy weighed on Europe's stock markets as the anti-establishment Five Star Movement and the League, which are in talks to form a government, were reportedly considering asking the ECB for debt relief.

That sent Milan's FTSE MIB index plummeting.

The threat of geopolitical setbacks to the markets remained, with North Korea moving back into the spotlight as it threatened to cancel next month's historic summit between Kim Jong Un and Donald Trump.

The announcement came as a shock after months of rapid diplomatic rapprochement that has fuelled hopes for peace on the peninsula.

Earlier Wednesday it cancelled a meeting with South Korea at the last minute, blaming joint US-South Korean military exercises, which it called a "rude and wicked provocation".

Pyongyang's shock announcement came as investors were trying to juggle several other global issues, including the outcome of Trump's decision to pull out of the Iran nuclear deal, ongoing turmoil in the Middle East and the China-US trade spat.

There are hopes for a positive conclusion to the tariff stand-off between Washington and Beijing, but the latest round of talks will be closely monitored after a previous high-level meeting ended with no agreement and both sides far apart.

US-Europe relations, meanwhile, appeared to hit a new low Wednesday when the EU's top official launched a stinging attack on Trump, slamming his "capricious assertiveness", saying the US leader acted more like an enemy than a friend, and called US metal tariffs "absurd".